UPDATE 2-German bond yields rise to five-week high as U.S. yields jump on Georgia count

* Georgia vote count fuels reflation trade

* UST 10-yr yield above 1%; Bund yield at five-week high

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates levels)

LONDON, Jan 6 (Reuters) – Germany’s 10-year bond yields rose to five-week highs on Wednesday, pushed up by a jump in U.S. Treasury yields as expectations rose that a win for Democrats in a Senate runoff race in Georgia may signal more fiscal spending.

Democrats won one hotly contested U.S. Senate race in Georgia and pulled ahead in a second, edging closer to control of the chamber and the power to advance Democratic President-elect Joe Biden’s policy goals when he takes office this month.

It was this scenario, suggesting further fiscal stimulus and inflation, that bond markets appeared to be betting on.

Germany’s benchmark 10-year bond yield rose to -0.54% , its highest level in around five weeks. It was set for its biggest one-day jump in two weeks.

Euro zone bond yields were broadly higher and UK gilt yields touched a two-week high, reflecting a trend in world bond markets led by U.S. bonds.

The U.S. 10-year Treasury yield rose above 1% for the first time since March and was up 9.7 basis points on the day. The U.S. yield curve was at its steepest since 2017.

A key market gauge of long-term inflation expectations in the euro area, meanwhile, rose to 1.2871% — the highest level since early 2020.

Bond strategists said the reflation trade evident in U.S. markets would likely be less pronounced in the euro area, where inflation was likely to be further depressed by weak economic activity, given renewed restrictions to contain the coronavirus.

Indeed, economic activity in the bloc contracted more sharply than previously thought at the end of 2020. It could get worse as renewed lockdown restrictions hit the bloc’s dominant service industry, a survey showed.

IHS Markit’s final December Composite Purchasing Managers’ Index, seen as a good gauge of economic health, rose to 49.1 from November’s 45.3 but was below a flash reading of 49.8. Anything below 50 indicates contraction.

“For euro zone rates, there is an underlying tension between the recovery in traded inflation indicators and the near-term gloom that followed extensions of lockdown restrictions across the continent, most recently in the UK and Germany,” said Antoine Bouvet, a senior rates strategist at ING.

“We find it hard to justify further rises given the lack of a Fed-style commitment to let inflation run above the previously understood target from the European Central Bank.”

The ECB targets inflation near 2%. Its monetary policy remit is currently under review.

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